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Valuation method

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Valuation method

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • September 7, 2021 at 5:37 pm #634782
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    Is it correct that the Net Asset Value method is the minimum price that the owners are prepared to accept for the company?

    However, the PE ratio or Dividend Valuation Method is used to find out the share price of the company which is the maximum price that the owners are prepared to accept for the company?

    Lastly, the Net Value method, PE ratio, Dividend Valuation Method are all the methods to find out the share price which can be used for business valuation purposes.

    Please tell me which method is considered to be most accurate in real life and how the maximum & minimum prices are evaluated at the time of selling the company?

    September 8, 2021 at 6:20 am #634824
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You can never definitely state a minimum or maximum price – they are all something to be able to discuss.

    However the net asset value is going to be the very minimum the owners will accept (because the could get the same amount by simply closing and selling off the assets) assuming it is an unquoted company. If it is a quoted company then they are going to want at least whatever the current market value is of the shares.

    There is no such thing as an ‘accurate’ market value but using PE ratios is the most common in real life. The dividend valuation model is theoretical and is used to explain why the market values of shares are what they are, but the problem in practice is estimated future expected dividends and determining the required rate of return.

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